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How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is

by modoc 10y ago

How does that really help me if I'm buying/selling a specific stock (vs. being in a larger fund, etc...)? My, again very lay, understanding is that the HFT is likely to push my buy price up slightly and make money in the middle of me a non-HFT seller, and push down the price slightly on the sale side, again making money as a very fast middleman. I may have that completely wrong though.

harryh 10y ago
It helps you in 2 ways: 1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly. 2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.
tedunangst 10y ago
If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)
- harryh 10y ago
  Adverse selection! ;-)
infinite8s 10y ago
What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.
fleitz 10y ago
Unless you are exceeding the liquidity on a single exchange HFT will never affect you. Here how it works... Imagine you want to BUY 10000 MSFT... You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price. Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills. However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.
- harryh 10y ago
  And how do you convince the suckers to go to IEX? Incredibly cynical marketing! https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
- tuna-piano 10y ago
  I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?
  - kasey_junk 10y ago
    Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.
- usefulcat 10y ago
  "You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price." Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A. In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..). So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.

by modoc 10y ago

harryh 10y ago

It helps you in 2 ways: 1) It reduces the bid/ask spread. There isn't just one price for a stock, there are two. The price at which you can buy and the price at which you can sell. The price at which you can sell is lower. So when you buy a share of stock you are immediately down a little bit. This amount is called the spread. By automating firms can reduce this spread which does the opposite of what your intuition told you. It will bring buy prices down slightly and sell prices up slightly. 2) It helps make sure that prices are as accurate and up to date as possible. When you go to buy a share of $GOOG you probably aren't really sure if it should cost 775.40 or 775.45 or 775.50. You just figure it's a good company and likely to go up in the future. But because there are all these firms working really hard and acting really fast you can be pretty confident that whatever price you buy at at any given time contains the total available knowledge currently available in the world about Google's future potential.

tedunangst 10y ago

If you think HFT is going to push up the buy price, set your limit a penny lower and wait a second for the "slow" traders to handle it. (If that's how you think markets work.)

harryh 10y ago
Adverse selection! ;-)

infinite8s 10y ago

What you are missing is that in the old days, your buy/sell order was probably handled by a human market maker instead of an HFT's algo, who would push up/down the price much more than 'slightly', hence making you pay more in trading costs. The biggest opponents of HFTs are the major financial institutions who used to provide those market making roles.

fleitz 10y ago

Unless you are exceeding the liquidity on a single exchange HFT will never affect you. Here how it works... Imagine you want to BUY 10000 MSFT... You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price. Since retailers will very likely never exceed the liquidity on a single exchange they'll never have any issue with HFT and will just experience increased liquidity and faster fills. However, if you're a large dinosaur still sending huge orders now you'll need a group of suckers who want to trade only with you, enter IEX, and 'consumer' protection from HFT on their exchanges who now has a large pool of suckers to trade with.

harryh 10y ago
And how do you convince the suckers to go to IEX? Incredibly cynical marketing! https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
tuna-piano 10y ago
I kind of agree with your underlying premise, but when I invest in a mutual fund / ETF, isn't that a giant investor that might be affected by HFT? And if that was costing the fund money, wouldn't that affect me (without me seeing it directly)?
- kasey_junk 10y ago
  Assuming that hft forms didn't drive other prices down. In particular the costs to trade (in the form of the spread, fees & execution costs) hadn't been decimated by hft firms.
usefulcat 10y ago
"You send your order to exchange A, it does a partial fill for 1000 orders, and sends the remainder to exchanges b,c,d. An HFT firm sees your order to exchange A knows its not going to fill and sends its own orders to buy the liquidity on B,C,D and then sends sell orders at a higher price to B,C,D, your order fails to fill and you have to issue a new order at a higher price." Maybe, but that seems like a pretty risky strategy. A simpler and far less risky strategy that would look very similar (admittedly only if you're looking exclusively at orders on the book and not fills) would be for HFT market makers to cancel or reprice their existing resting orders on exchanges B, C, D in response to getting or seeing a large fill on A. In the strategy described by the parent, in addition to having to cross the spread, the HFT firm would also be at the back of the line at the next price level (unless maybe they already have an order there? but no guarantee that it's the right size, or maybe they have multiple small orders and cancel whatever is in excess of the position..). So I'm genuinely curious: is what the parent describes something that is really that commonly done? This is one of the things that made me highly skeptical of Flash Boys. It seemed to me they observed a phenomenon, came up with a single explanation for it and never even considered any other possibilities that didn't fit the chosen narrative.